7. Mortgages Flashcards
(163 cards)
1
Q
What is the modern word for mortgage?
A
Charge
2
Q
What does redeeming a mortgage mean?
A
Redemption extinguishes the rights formerly enjoyed by the mortgagee.
3
Q
What is the mortgage itself, contrary to everyday language?
A
The mortgage is the security for the loan and is not the loan itself, although in everyday language we tend to suggest otherwise.
4
Q
Who is the mortgagor v the mortgagee?
A
borrower – the mortgagor
lender – the mortgagee
5
Q
In lease terms, what is a mortgage?
A
It is when the mortgagee acquires a long lease (freehold) or a sub-lease (leasehold) of the land, or a charge over the land. It will end when all the money lent and interest payable has been repaid.
6
Q
What is cesser on redemption?
A
It is when the mortgage ends once the money lent and all interest payable have been repaid.
7
Q
What is the difference between vivum vadium and mortuum vadiam?
A
A vivum vadium (live pledge) used income from the property to discharge the debt.
A mortuum vadium (dead pledge) where, as well as being repaid the original debt, the lender would charge interest. This “dead pledge” developed into the classical English “mort gage”, that is, a mortgage.
8
Q
Which way of obtaining a mortgage is no longer available and why?
A
A mortgage cannot now be created by a conveyance of the whole estate to the mortgagee. This meant that the lender (mortgagee) would own the property subject to the mortgage conveyed to them and if they did not pay by the contractual redemption date, the borrower (mortgagor) would lose their land.
9
Q
What did equity introduce to combat the harsh effect of the contractual redemption date in old mortgages?
A
To combat the harsh effect of non-payment, equity intervened to allow an equitable right to redeem, which arises after the contractual date for repayment has passed. The mortgagor can repay the mortgage and will not lose their land.
10
Q
In old mortgages, could the equitable right to redeem be lost?
A
This right to redeem in equity would be lost only if the mortgagee was successful in an application to the Court of Chancery for an order of foreclosure – bringing to an end the right to redeem and allowing the mortgagee to retain the land.
11
Q
What is a contractual redemption date?
A
This is the date on which the mortgagor should repay their loan at common law.
12
Q
What is the equitable right to redeem?
A
This is the right, recognised by equity, to pay off the loan after the contractual date has passed. Because of this equitable right, the contractual date is now fixed conventionally at a relatively short time period, usually six months. In effect, this is the earliest date on which the mortgage can be repaid.
13
Q
What is foreclosure?
A
This is a court order which brings the equitable right to redeem to an end vesting the mortgaged property in the mortgagee. In fact, in spite of the term’s frequent use, foreclosure is rare today. The mortgagee’s usual remedy for non-payment is to sell the land and pay off the loan out of the proceeds.
14
Q
What is the equity of redemption?
A
This is the sum total of equitable rights which the mortgagor has in the property. It includes the equitable right to redeem and the financial value of the land to the mortgagor – that is, its market value minus the value of the unpaid mortgage.
15
Q
Can a mortgage be recognised by law and by equity?
A
Yes, a mortgage can be recognised by law or by equity.
16
Q
What governs the creation of legal mortgages?
A
Law of Property Act 1925.
17
Q
Can freehold mortgages now be created without the mortgagor losing their estate in land?
A
Yes, mortgages can only be created by two methods under s85(1) LPA 1925, both which allow the mortgagor to retain their estate in the land. A mortgage cannot now be created by a conveyance of the whole estate to the mortgagee.
18
Q
What are the two methods of creating freehold mortgages under s85(1) LPA 1925?
A
A mortgage can only be created by:
A term of years absolute (a lease), or;
A legal charge (by deed)
19
Q
Explain the first method of creating a freehold mortgage; the term of years?
A
This is when a legal freehold mortgage is created by the mortgagee being granted a long lease (typically for 3,000 years) subject to cesser on redemption (when the mortgage has been repaid, the lease ends). The mortgagor retains the freehold.
20
Q
What is more important to the mortgagor when creating a term of years mortgage; the right to take free of the lease in 3,000 years’ time, or the right to pay off the mortgage and terminate early?
A
Their real interest in the land, however, is not the right to take free of the lease in 3,000 years’ time – it is the right to pay off the mortgage and terminate early that is of importance for them.
21
Q
What are the benefits to the mortgagee of a term of years mortgage?
A
As it is a lease, the mortgagee has the right to go into possession immediately - a right that they will exercise if the mortgagor is late on repayments.
22
Q
Is a term of years mortgage a legal interest?
A
Yes, if it is created by deed, it qualifies as one of the two legal estates in land (s1(1)(b) LPA 1925).
23
Q
Which is simpler and more commonly used - the term of years mortgage or the legal charge mortgage?
A
The legal charge mortgage.
24
Q
What is a legal charge freehold mortgage?
A
It is not an actual mortgage but, by s87 LPA 1925, the chargee has the same rights, remedies and liabilities as if a mortgage by way of a lease had been created - they can still go into possession.
25
Is a charge by way of legal mortgage a legal interest?
Yes, a charge by way of legal mortgage qualifies as a legal interest under s1(2)(c)LPA 1925.
26
Under s23 Land Registration Act 2002 (LRA 2002), which method is the only way a mortgage of registered land can be created?
A mortgage of registered land can only be created by a charge.
27
Which situation might a mortgage take effect as a lease nowadays?
If there is an attempt to convey the whole estate subject to retransfer on redemption, then, by s85(2) LPA 1925, the disposition is invalid and the mortgage takes effect as a lease for 3,000 years.
Or a second mortgage of freehold land.
28
How would a second mortgage of freehold land take effect?
A second mortgage of freehold land takes effect as a lease for a time period longer in duration than the first mortgage, for example, one day longer. Similarly, subsequent mortgages will be for longer than the previous mortgage.
29
How can a leasehold mortgage be created?
Obviously it can’t be created by means of a lease. But it can be created by means of a sub-lease under s86(1) LPA 1925. Either this, or as a legal charge.
30
Can a mortgage be created by way of assignment of the whole leasehold interest?
No, it is invalid - it will instead take effect as a sub-lease for 10 days less than the original lease.
31
Why does the first sub-lease mortgage (created when assignment of a whole leasehold interest fails) take effect for 10 days less than the original lease?
The first mortgage being 10 days shorter than the original term allows for the creation of subsequent mortgages.
32
What are the four ways a mortgage can be created in equity?
1) Agreement for mortgage
2) Equitable charge
3) Mortgage of an equitable interest
4) Prior to registration in registered land
33
How can an ‘agreement for mortgage’ be an equitable mortgage if it isn’t in a deed?
An agreement for a mortgage will be regarded by equity as an equitable mortgage from the date of the contract. See the rule in Walsh v Lonsdale [1882] where the rules of equity enabled a landlord to enforce a term of a lease with the claimant, despite the lease not being created by a deed.
34
Can a deposit of title deeds by way of security create a mortgage or charge?
No, it used to before 1989, but now the mortgage cannot rise of its own accord and must comply with s2 LP(MP)A 1989.
35
When would an equitable mortgage arise as an ‘equitable charge’ and are they common?
Equitable charges arise where an estate owner shows an intention to charge specific property with the repayment of a debt or other obligation. Creation by this method is extremely uncommon.
36
Is it possible to have a legal mortgage of an equitable interest?
No, any mortgage of an interest which cannot exist as a legal estate or interest (see s1(10 and s1(2) LPA 1925) must be equitable, e.g. a mortgage of a life interest under a settlement.
37
Why does a mortgage ‘prior to registration in registered land’ have to be equitable?
Because a mortgage is not legal until its actual registration at HMLR. Therefore, during the period following its execution and before registration, it will exist as an equitable mortgage.
38
What happens if a legal mortgage is never registered at HMLR?
It will not be a legal mortgage, but will stay as an equitable mortgage, though it would require protection by the entry of a notice under s34 LRA 2002 (unless it is an overriding interest i.e. actual occupation).
39
What is the equity of redemption?
It is the sum total of the mortgagor’s rights in the property, recognised by equity.
40
What is equity’s view on the mortgagee encroaching on the mortgagor’s equity of redemption?
Equity will not allow unfair advantage to be taken of the mortgagor.
41
What is meant by ‘clogs or fetters’?
The right to redeem must not be subject to any restrictions, known as clogs or fetters, as it is the primary right of the mortgagor.
42
What is the primary right of the mortgagor?
The right to redeem the mortgage upon the payment of the mortgage money and any interest.
43
What does the maxim ‘once a mortgage, always a mortgage’ mean?
It means the court will look behind the transaction in question and if it is, in fact, a mortgage it will be deemed as such even though it may be called something else.
44
What is the difference between the right to redeem and the equity of redemption?
The right to redeem is just one right (the primary right) and the equity of redemption is all the mortgagor’s rights and is an interest in the land.
45
Outline the case of Samuel v Jarrah Timber & Wood Paving Corp Ltd [1904].
In the leading case of Samuel v Jarrah Timber & Wood Paving Corp Ltd [1904] debenture stock worth £30,000 was mortgaged to Samuel to secure an advance of £5,000 at 6% interest. The mortgage money was to become payable with interest at 30 days’ notice on either side. Samuel, the mortgagee, was given ‘the option to purchase the whole or any part of such stock at 40 per cent [a fixed price] at any time within 12 months’. Samuel claimed to exercise the option and the mortgagor, Jarrah, sought to redeem and have a declaration that the option was illegal and void because it extinguished the mortgagor’s right to redeem.
Although reluctant to do so, as the arrangement in this case amounted to a “perfectly fair bargain”, the House of Lords held that the option was void and granted the declaration. They said there could not be any conditions made at the time of the loan that prevented the mortgagor from getting back his property once he had paid off the loan. This was to protect the mortgagor. However, they wished they could find a way to modify the rule to stop it being used to avoid a fair bargain between two people dealing at arm’s length and negotiating on equal terms.
46
Are clogs and fetters postponing the right to redeem or excluding it altogether?
Clogs and fetters exclude a mortgagor’s right to redeem altogether.
47
Will courts allow a provision in a mortgage deed to postpone the date of redemption?
Yes, they will allow a long postponement, as long as it isn’t to make the right to redeem illusory.
48
Outline the case of Knightsbridge Estates Trust Ltd v Byrne [1939].
K owned certain freehold property and arranged a loan from the defendants at 5¼ per cent interest, repayable over 40 years, repayment to be made by half-yearly instalments over the 40 years. The defendants undertook not to require payment in any other way, so long as instalments were paid promptly. Less than six years later, K claimed to be entitled to redeem upon payment of principal, interest and costs, on the ground that the 40-year term constituted a clog upon their right to redeem. The Court of Appeal held that the term was valid.
49
What is a collateral advantage?
It is when the mortgagor is required to do something as part of the mortgage, like only purchase supplied from a brewery if the brewery granted the loan.
50
Are collateral advantages acceptable in mortgage deeds?
Any collateral advantages that exist beyond redemption are void, but those which exist only until redemption may be valid if they don’t amount to unreasonable restraint of trade. Once the mortgage has been paid and any interest settled, if the advantage is then discarded, that should be fine.
51
What happens to contracts in restraint of trade?
These are prima facie void as being contrary to public policy. They are valid if they go no further than is reasonable and are in the best interests of the public and of the parties to the contract. In mortgages, even though the mortgage may not have been redeemed, a collateral advantage may be invalid as being an unfair restraint of trade.
52
What is a solus agreement?
Where a trader (usually pubs or petrol stations) is tied to a particular supplier, receiving all their merchandise from that supplier and from no-one else.
53
What would make a solus agreement void in a mortgage?
Whether the agreement is reasonable or not depends mainly on the time for which the agreement lasts – the longer the duration, the less the likelihood of validity.
In Alec Lobb (Garages) Ltd, a 21-year solus agreement was valid because 1. The mortgagor benefitted from being saved by the mortgagee, 2. He waited 10 years before complaining and 3. There were break clauses in the agreement.
54
What will the courts do if the mortgage includes ‘oppressive or unconscionable’ terms?
The courts will use its powers to strike down the terms.
55
What are two examples of where the courts’ used their powers to strike down ‘oppressive or unconscionable’ terms in a mortgage?
Cityland v Dabrah [1968] - landlord charged about 50% interest when lending the tenant money to buy the property as he was of limited means. Court changed it to 7% interest.
Multiservice Bookbinding v Marden [1979] - mortgage based on currency which fluctuated (swiss franc), 36K went to 133K, but building worth trebled. Courts ruled that as both parties were businessmen and they had independent legal advice, the terms were valid.
56
How common is protection from oppressive or unconscionable terms at the moment?
The protection from oppressive or unconscionable terms appears to be limited to extreme cases. The courts today are reluctant to see terms in complex contracts as clogs or collateral advantages.
57
What is the relationship between the Consumer Credit Act 2006 and the Financial Services and Markets Act 2000?
The CCA 2006 created an unfair credit relationship test between creditor and debtor to control extortionate credit agreements. This test applied to all existing and new mortgages, but not to first residential mortgages, which are covered by the FSMA 2000.
58
What happened to mortgages post 2016?
From March 2016 all new regulated mortgages came under FSMA 2000, where the aim is to protect consumers through responsible lending practices, including affordability checks and better information about mortgage products. The government implemented the Mortgage Credit Directive into UK law in March 2016 to align with EU law. It requires lenders to conduct an affordability test and provide advice that meets a minimum standard.
59
Does the mortgagor have the right to grant leases?
s99 LPA 1925 gives the mortgagor the statutory power to grant leaves binding to both mortgagor and mortgagee. These are usually excluded from most residential mortgages. In such cases, the mortgagee’s consent would be required before a lease could be granted.
60
What is undue influence?
When somebody is pressurised into accepting very unfavourable terms in the mortgage, e.g. when a vulnerable elderly person has been pressurised into entering into a transaction such that it is against their own free will and not in their best interests, or a husband persuades his wife to sign the mortgage agreement under false pretences.
61
What will courts do with mortgages with undue influence?
The court may set aside, or decline to enforce, any bargain, including a mortgage, reached by means of undue influence.
62
What is a surety?
A surety is a person who acts as a guarantor for another’s debts.
63
What are the two types of undue influence?
Actual or presumed.
64
When is undue influence presumed?
When there is a relationship of trust and confidence combined with circumstances justifying the presumption that the relationship was abused in order to achieve the bargain.
65
What are the three questions asked when addressing issues of undue influence?
(1) Is there undue influence?
(2) Is the mortgagee tarnished with the undue influence?
(3) Has the mortgagee taken steps to ensure that its mortgage is not void because of the undue influence?
66
What is the most important case concerning undue influence?
Barclays Bank plc v O’Brien [1993]
67
Outline Barclays Bank plc v O’Brien [1993].
In Barclays Bank plc v O’Brien [1993] the husband owned a manufacturing company. The company had a large overdraft with the bank and, in order to secure overdraft facilities, both the husband and wife signed a second charge over their house in favour of the bank. The wife was a surety for her husband. A surety is a person who acts as a guarantor for another’s debts. The wife did not read the charge and when the bank sought to enforce the charge she argued that her husband had pressurised her into signing it, that she thought that it would only be for three weeks and that her husband had led her to believe that the charge was limited to £60,000 (as opposed to the total debt of £135,000).
The House of Lords held that there was no undue influence but there was misrepresentation. The bank would have constructive notice of any right of the surety (the wife) to have the charge set aside, here the misrepresentation, unless the bank had taken reasonable steps to satisfy itself that there was no such right. In order to avoid liability, the bank should have warned the surety of the potential liability, the risks involved and advised her to take independent advice. As this was not done, it was held that the bank could not enforce the charge against the wife.
68
What are the classes of undue influence set out in O’Brien?
Class 1 is actual undue influence.
Class 2(A) is presumed undue influence because of the relationship of the parties, for example, doctor and patient.
Class 2(B) is where the claimant had to prove that confidence and trust were placed in the wrongdoer, for example, husband and wife.
In Class 2 the claimant would have to show that they were disadvantaged by the transaction, called a manifest disadvantage.
In Class 2, the burden of proof changed and was on the wrongdoer.
69
What did banks do following O’Brien?
Banks adopted the practice of relying exclusively on a lawyer’s certificate that the purpose and effect of the documentation had been explained to the surety prior to signature.
70
Why was Royal Bank of Scotland plc v Etridge (No. 2) [2001] important?
It is where the House of Lords moved away from O’Brien and attempted to lay down clear and simple procedures to be applied in the future in order to protect the surety and reduce the risk of undue influence to a minimum.
71
Outline the procedures that should be applied to protect the surety and reduce the risk of undue influence from Etridge?
(1) Under Etridge the test for presumed undue influence is whether there is a relationship of trust and confidence combined with a transaction which called for an explanation – if so, the burden falls on the wrongdoer to rebut the presumption.
(2) Although most of the cases before the courts had involved wives acting as sureties for their husbands’ debts, the bank is always put on enquiry whenever the relationship between the debtor and surety is non-commercial.
(3) For the purposes of Pitt, a loan to the husband’s company is not a joint loan even where the wife is a director or secretary of the company or owns a minority or even an equal shareholding with her husband.
72
In order to protect the mortgagee from being tarnished with the undue influence:
(1) The bank does not have to have a meeting with the surety but should ensure that the surety receives legal advice and that the bank receives confirmation from the lawyer confirming that the nature and implications of the mortgage have been explained to the surety.
(2) The lawyer should advise the surety of any potential liability at a face-to-face meeting in the absence of the mortgagor.
(3) The role of the lawyer is to explain the nature of the documents, their practical consequences and the seriousness of the risks involved.
(4) The bank should provide the lawyer with the necessary financial information to enable the lawyer to advise.
(5) It is not for the lawyer to veto the transaction, although if it is glaringly obvious the surety is being grievously wronged, the lawyer should decline to act further.
(6) The lawyer may also act for the mortgagor or the bank provided that they are satisfied it is in the surety’s best interests and there is no conflict of interest.
(7) Normally, the bank will be able to rely upon the lawyer’s certificate confirming the discussions without question, but it will not be protected if it knows, or ought to have known, that the lawyer’s advice was either not given or inadequate.
73
What are the main two criteria for presumed undue influence, discussed in Etridge?
In order for the undue influence to arise, there must be a relationship of trust and confidence, which could give rise to potential influence, and the transaction must be one which had to be explained.
74
What does it mean to put the bank on inquiry?
The bank will be questioned as to the circumstances in which the claimant had given their consent to a mortgage. The security provided will not be enforceable by the bank, unless it has taken reasonable steps to satisfy itself that the surety’s consent had been properly obtained.
75
Would a business partnership be considered as a relationship which could give rise to potential influence?
No, see Brown v Stephenson, where Mrs Brown’s claim failed as the relationship did not qualify and she had received advice from a solicitor.
76
Would a husband having an affair be considered as something that should be disclosed before a wife agrees to be a surety?
Yes, see Hewett v First Plus [2010]. Mrs Hewett should have been told about the affair so that she could make an informed decision. First Plus knew that the money was to be used to pay off Mr Hewett’s debts but failed to follow the guidelines in Etridge in advising Mrs Hewett - they could not enforce the mortgage against her.
77
How many remedies can the mortgagee choose to use against the mortgagor if they default on the repayments of the loan?
The remedies are cumulative and the mortgagee can use any or all of them.
78
What are the remedies for mortgages?
Personal action
Possession
Sale
Appointment of receiver
Foreclosure
79
What is a personal remedy?
A personal remedy is to sue the mortgagor for the recovery of the principal sum and any interest that may be due, based on the mortgagor’s promise to repay.
80
Why are personal remedies not always the best option for mortgagees?
If the mortgagor is not meeting the repayments, they’re unlikely to be able to meet any further demands.
81
If a mortgagor cannot meet the repayments, can they transfer their interest in the property?
Yes, they can,but the mortgagor still remains liable on their covenant to pay the mortgagee if they transfer the interest without redeeming the mortgage. They’ll usually take a covenant of indemnity from their transferee though.
82
What is the statute limitation on actions to recover the principal money and interest?
Any action to recover the principal money is statute-barred under s20 Limitation Act 1980 unless brought within 12 years of the date when the right to receive the money arose. An action to recover interest is statute-barred after six years under s20.
83
How can a mortgagee extend the statute limitation on the principal money?
Each time some part of the principal or interest is paid or a written acknowledgment of their liability to pay is given by the mortgagor to the mortgagee, the period begins to run afresh.
84
What happens if money is still owed to the mortgagee after sale?
Suing for the debt may still be used as a remedy if money is owed to the mortgagee after sale.
85
Can a mortgagee sue for personal remedy on equitable mortgages?
Yes, just as the legal mortgagee can. Again though, it is only feasible if the mortgagor has the money to pay.
86
What are the rights of possession for both types of legal mortgage, i.e. term of years and charge?
When there is a charge by way of legal mortgage, under s87 LPA 1925 the mortgagee has the same rights and remedies as if they had a lease. A term of years is a lease. Therefore, they have the right to exclusive possession, which they may exercise immediately.
87
Can a mortgagee enter into possession immediately if the mortgagor is not in breach?
Yes, as the legal mortgage is a lease, they can seek possession immediately at any time.
88
Can the mortgagee exclude their right to possession?
Yes, they might expressly or impliedly exclude their right to possession.
89
How would a mortgagee usually seek possession?
By obtaining a court order for possession, otherwise there is the risk of committing an offence under the Criminal Law Act 1977 or also, if the property is residential, under s1 Protection from Eviction Act 1977.
90
How often would a mortgagee be granted a court order for possession?
It is clear that a mortgagee would be restrained from getting possession except when it is sought bone fide (when it is really needed).
91
What four things protect the mortgagor from possession?
Courts often grant relief against possession/adjournment (albeit 28 days)
s36 Administration of Justice Act 1970, postponing possession if a mortgagor is likely to be able to pay sums due without a reasonable period.
Due diligence and eviction is onerous on the mortgagee.
The complication of third parties
92
Outline Cheltenham and Gloucester Building Society v Norgan [1996]?
The Court of Appeal held that a reasonable time (as mentioned in s36 AJA 1970 for possession) might constitute the remainder of the mortgage term. Thus, the mortgagor was given 18 years in which to find the amounts owed. Such a long suspension of possession is at the discretion of the court.
93
Is it possible in line with s36 AJA 1970 to extend the period for possession after the end of the mortgage term?
Yes, LBI HP v Stanford [2015] confirmed that under s36 AJA 1970 it is possible for the court to extend the period for possession after the end of the mortgage term. So, the mortgage hadnt been paid since 2008 and the term expired in 2012 - in 2015 the order for possession had been extended.
94
What should courts do if there is little or no evidence of a prospect of the mortgagor repaying the arrears as well as keep up with forthcoming mortgage payments? What is the exception?
The courts should not use Norgan to suspend possession for a long time - it should order possession instead. The one exception to this is that the court may suspend possession to give the mortgagor time to find a buyer, rather than allowing the mortgagee to sell.
95
Should the mortgagor be allowed to remain in possession of a property pending a sale by the mortgagee?
No, in Cheltenham and Gloucester Building Society v Booker [1997], the Court of Appeal made clear that the mortgagor should not be allowed to remain in possession pending any sale by the mortgagee unless there were exceptional circumstances. The mortgagee is entitled to possession as the mortgagor is unlikely to co-operate with the lender in conducting any viewing by potential buyers!
96
What should a lender do if the borrower can prove that they have taken reasonable steps to market the property at an appropriate price following professional advice?
They should postpone possession and then the borrower must take all reasonable steps to actively market the property.
97
What is the major flaw to s36 AJA 1970?
If the mortgagor falls into arrears, the whole capital amount would become due.
98
How was the major flaw in s36 AJA 1970 addressed?
s8 Administration of Justice Act 1973 was passed in order to deal with the problem that if the mortgagor falls into arrears, the whole capital amount would become due.
If the mortgage provides for deferral or postponement of payment of the capital money, then any provision for advance payment on falling into arrears is ignored when assessing a reasonable time for payment of any sums due. Accordingly, the accelerated capital payment is ignored and only actual arrears are taken into account. Most residential mortgages come within s8 as there is a provision for deferring or postponing payment of the capital money.
99
When would s8 AJA 1973 not apply?
For mortgages which are taken out to secure overdrafts. If repayment of the overdraft is demanded, s8 is not available.
100
If a court order is not applied for and the mortgagee wants to take possession, how must they approach it? How does that disadvantage the mortgagor?
Such possession must be peaceable and entry must not be obtained by force. In such cases, the relief afforded by s36 will not be available and the mortgagor will lose the defence under AJA 1970.
101
Which two reasons contribute to the mortgagee being reticent to use their immediate right to seek possession of the mortgaged property due to the administration?
A mortgagee in possession:
1. They have to evict the mortgagor and do this with thousands of properties for a vacant sale.
2. They have to manage the property with ‘due diligence’ otherwise they could get sued.
102
Why is it important to get vacant possession if the mortgagee wants to sell the property?
There may be someone with a proprietary right to possession living in the house (actual occupation) or there could be beneficiaries behind a trust of land. These are interests that override (in registered land) or situations that need actual, constructed or imputed notice (in unregistered land) and if they do not get notice, there will be problems with the sale.
103
If a tenant is granted a lease in breach of the mortgage agreement between the landlord and then mortgagee, do they have a right to remain in possession?
No, they don’t. Even if they have an agreement with the landlord, they have no agreement with the mortgagee.
104
What is the Pre-action Protocol for Possession Claims Based on Mortgage Arrears in Respect of Residential Properties?
Published in 2008, revised in 2017, to ensure the mortgagor and mortgagee act fairly with each other, looking at why payments have fallen into arrears and the mortgagor’s financial circumstances.Taking possession is seen as a last resort. Lenders should be able to explain how they have complied with the protocol to the court.
105
What new rules did the FCA introduce in 2014?
They introduced new rules for mortgage lenders to make sure that people could afford a mortgage before they took it out and that it suited their needs and circumstances. The potential mortgagor must provide information about income, expenditure and the ability to pay the mortgage if interest payments were to increase.
106
What are the rights of possession for equitable mortgages?
There are no rights of possession in equitable mortgages unless the right to do so has been expressly reserved or unless the court makes an order to that effect.
107
What does s101 LPA 1925 provide for?
s101 LPA 1925 provides that every mortgagee has a power of sale provided that:
the mortgage was made by deed; and
there is no contrary provision in the deed; and
the mortgage money is due, that is, the legal date for redemption has passed.
If the mortgage money is repayable by instalments, the power of sale arises as soon as any instalment is in arrears.
108
What does s103 LPA 1925 provide for?
If all three conditions of s101 are satisfied, the mortgagee’s power of sale arises. It does not become exercisable until one of the conditions laid down in s103 is complied with:
there has been three months’ default in repayment of the loan after the mortgagee has served notice requiring payment upon the mortgagor; or
interest is at least two months in arrears; or
there has been a breach of some other covenant in the mortgage deed, or of some other statutory provision (in Bishop v Blake [2006] the power of sale became exercisable when there was a breach of a covenant to obtain the defendant’s written consent for the grant of a lease to a third party).
109
When can the mortgagee sell the mortgaged premises under s101 and 103 LPA 1925?
The mortgagee can sell the mortgaged premises once all three requirements of s101 have been complied with, plus any one of the s103 requirements.
110
Is s101 in breach of the right to peaceful enjoyment of property under Art 1 Protocol 1 European Convention on Human Rights?
It was stated that s101, which allows a mortgagee to sell a property without first obtaining a court order for possession, was not in breach of the right to peaceful enjoyment of property under Art 1 Protocol 1 European Convention on Human Rights.
111
Is the buyer of a mortgaged property protected if there are problems with the sale?
Under s104 LPA 1925 the buyer of the mortgaged property is protected if none of the three conditions under s103 have been satisfied and if the power of sale has in some other way been improperly or irregularly exercised unless the buyer knows of the irregularity.
112
Whose responsibility is it to advertise a property put on the market by the mortgagee?
It is the mortgagee’s responsibility and it is up to them to decide how the sale should be advertised/how long it should be up there for. As long as they behave reasonably, they can control the whole process.
113
What should the main purpose of the sale of a mortgaged property by the mortgagee be?
In order to recover the debt. Other motives do not matter.
114
What price must a mortgaged property get for sale if the mortgagee is a building society?
‘The best price which can reasonably be obtained.’
115
Can a mortgagee sell a mortgaged property back to itself after it has taken possession?
No, regardless of whether it is at market value or not.
116
What happens if a sale of a mortgaged property was to a person or entity associated with the mortgagee?
The burden of proof is on the mortgagee to prove that the sale was an arm’s-length transaction and there was no conflict of interest. They must be able to prove that they got the best price for the property.
117
When can a mortgagor push for the mortgagee to sell the property?
Although the timing of the sale is at the discretion of the mortgagee, there may be a situation where the mortgagor can compel a sale of the property by applying to the court under s91(2) LPA 1925. The mortgagor may want to do this where there is no prospect of paying off any arrears and they wish to be rid of their liability.
118
What happens to the money received from the buyer of a mortgaged property?
By s105 LPA 1925, the money received from the buyer is held by the mortgagee, after paying off all prior mortgages, on trust:
- to pay all expenses incidental to the sale;
- to pay themself the principal, interest and costs due under the mortgage; and
- to pay the surplus, if any, to the next mortgagee or, if none, to the mortgagor (even if they got the mortgage illegally).
A mortgagee who has a surplus should therefore search in the register of land charges in unregistered land, or the register of title in registered land, as the case may be, to discover the existence of any subsequent (or prior) mortgages.
119
Do equitable mortgagees have the same statutory power of sale enjoyed by legal mortgages?
Only if the mortgage was made by deed. This includes a deposit of title deeds with a memorandum under seal. The court can order a sale in favour of an equitable mortgagee even though the mortgage was created without the formality of a deed.
120
What must be in the deed if an equitable mortgage wants the same statutory powers of sale as legal mortgages?
In order for such a mortgagee to be able to convey a legal estate to a buyer, one of the following devices must be employed:
- a power of attorney inserted in the deed empowering the mortgagee to convey the legal estate; or
- a clause inserted in the deed whereby the mortgagor declares that they hold the legal estate on trust for the mortgagee and empowers the mortgagee to appoint someone, including themself, as trustee in place of the mortgagor.
121
What is the right to appoint a receiver?
It is the mortgagee’s right to appoint somebody to sell the property on their behalf.
122
Which section of the LPA 1925 is the appointment of receiver?
s109 LPA 1925 - the mortgagee has the right to appoint a receiver.
123
How does the mortgagee’s powers to appoint a receiver airse and become exercisable?
In the same way and on the same vents as their power of sale.
124
Who is liable for the receiver’s acts?
The receiver is an agent of the mortgagor, even though they are appointed by the mortgagee.
125
When would a receiver be appointed?
Where the mortgaged property has been leased by the mortgagor to third parties and a method is required to prevent the rents reaching the mortgagor so that they can be set against the mortgage debt
126
Would appointing a receiver be usually in residential or commercial conveyancing?
Usually commercial, it would not be usual to appoint a receiver in a residential situation.
127
What must a receiver do and what order must they apply any money?
The receiver has power to recover the income of the property by action or distress or otherwise and to give valid receipts. They are bound to apply any money received in the following order:
(a) discharging outgoings;
(b) paying interest on prior incumbrances;
(c) paying their own commission and other expenses;
(d) payment of the mortgage interest; and
(e) discharging the principal sum if so directed in writing by the mortgagee.
Any money left over must be paid to the mortgagor.
128
When would appointing a receiver be applicable to equitable mortgages?
Only when the mortgage was created by a deed. Or the court has jurisdiction under s37 Senior Courts Act 1981 to appoint a receiver in the absence of a deed.
129
What is foreclosure?
Foreclosure proceedings mean that the mortgagee acquires the land for themself freed from the mortgagor’s equity of redemption.
130
When would foreclosure be used?
It is used when it becomes clear that the mortgagor is never going to be able to repay the debt.
131
What is the most unfair part of foreclosure?
If the value of the land is more than the mortgage money owed, the mortgagee does not have to pay the difference to the mortgagor.
132
When does the right to foreclose arise?
When the legal date for redemption has passed.
133
When is it most usual for foreclosure to be used?
Usually when there’s been a breach of a specified condition of the mortgage.
134
What does it mean when a court grants a foreclosure order ‘nisi’?
It allows the mortgagor time (usually, six months) in which to repay the loan. If the sum due is not paid at the end of this period, a foreclosure order absolute is made.
135
What is the effect of a foreclosure order absolute?
The effect of this is to vest the fee simple absolute (or other whole estate of the mortgagor) in the mortgagee and to extinguish their mortgage term and all subsequent mortgage terms.
136
If there is more than one mortgage on the same land, what would happen with foreclosure?
All interested in the equity of redemption should be joined as parties.
137
If the second mortgagee of a property brings a foreclosure action, who does this effect?
Rights of prior mortgagees are not affected, so not the first mortgagee, but all the subsequent mortgagees, i.e. the third and fourth.
138
Does the court have the power to stop foreclosure and order a sale instead? Why would they do this?
Yes, they can. If there is positive equity in the sale, the lender could earn extra money if foreclosure was ordered because they do not have to pay the mortgagor the difference between the value of the land and the mortgage loan. In this case, the court is likely to order a sale under s91 instead
139
When could the mortgagor still get sued after foreclosure?
Where, after the foreclosure absolute, the mortgagee finds that their debt is not fully satisfied, they can still sue on the covenant for repayment of the loan. By doing this, they revive the mortgagor’s right of redemption. Their right to sue on the covenant will, however, be extinguished if they have done anything which would render impossible the revival of the right of redemption, for instance, they have sold the property.
140
How do equitable mortgages foreclose?
Equitable mortgagees may foreclose in the same way as legal mortgagees, except that the court order will direct the mortgagor to convey the legal title to the mortgagee.
141
What are the rules for the priority of interests affecting a registered estate?
Under ss28–30 LRA 2002, interests rank in order of creation whether they are legal or equitable, unless the transaction is a registered disposition for value which has been completed by registration.
142
What will the mortgagee take the registered estate subject to?
The buyer for value of a registered estate (the mortgagee here) will take the estate transferred subject to any interests that have been completed by registration under s27 LRA 2002, interests which are overriding under Sch 3 and interests protected by entry on the register by means of a notice or a restriction on the charges register, but they will take free of any other interests (s29).
143
How do registered charges rank?
In the order in which they are entered on the register.
144
If a legal mortgagee holds the title deeds, who does their interest bind?
Their interest binds the world.
145
Why is the interest of a legal mortgagee holding the title deeds exempt from registration?
Because the absence of the title deeds will alert a subsequent mortgagee to the existence of a mortgage.
146
How could a second mortgagee obtain a legal mortgage when the first has the title deeds (but aren’t complete or have them under a pretext)?
It is possible that a second mortgagee may also obtain a legal mortgage “protected by deposit of title deeds”.
147
What is a puisne mortgage?
It is a legal mortgage in unregistered land, which is not protected by deposit of title deeds. It must be protected by an entry on the land charges register of a Class C(i) land charge
148
Does the fact that a puisne mortgage is legal give it priority over any equitable mortgage registered at the Land Charges Registry?
No, it does not.
149
Which two pieces of legislation deal with when there are two mortgages and neither is protected by the deposit of title deeds? How is priority determined?
s97 LPA 1925: Every mortgage shall rank according to its date of registration.
s4(5) Land Charges Act 1972: Unregistered Class C land charge created post 1925 will be void against a subsequent buyer (mortgagee) if it has not been registered before completion of the purchase (subsequent mortgage).
If the first mortgage is registered before the second is created, there is no problem. Mortgage A comes before Mortgage B.
If the first mortgage is created, followed by the second mortgage, then the first mortgaged is registered, followed by the second - Mortgage B will take priority (even if it had actual notice of the unregistered mortgage), under s4(5) LCA 1972. This is because it would be unfair that B will take subject to an interest that was unknown at the time of creation of B’s mortgage.
150
How should an equitable mortgage be protected?
By way of entry of a notice on the register, either agreed or unilateral.
151
If an equitable mortgage is not protected by registration, and the later mortgage is legal, which takes priority?
The legal mortgage takes priority over the equitable one upon registration unless the equitable mortgagee was in actual occupation and has overriding status under Schs 1 and 3 LRA 2002.
152
If an equitable mortgage is not protected by registration, and the later mortgage is also equitable, which takes priority?
The general equitable rule that “where the equities are equal, the first in time prevails” will apply. This rule applies even where the later equitable mortgage is protected by the entry of a notice.
153
If an equitable mortgage is not protected by registration, and the later mortgage is also equitable but has problems with fraud or estoppel, which takes priority?
Most likely the equitable mortgage without the problems of fraud of estoppel. The rule of “where the equities are equal, the first in time prevails” only applies where the equities are equal.
154
In unregistered land, if a mortgage is equitable but the mortgagee doesn’t hold the title deeds, how must the mortgage be protected?
By registering it as a Class C(iii) land charge.
155
In unregistered land, if a mortgage is equitable and the mortgagee does hold the title deeds, how must the mortgage be protected? How does it fare with priority?
If the equitable mortgagee does hold the title deeds, the mortgage is not capable of registrations (s2(4) LCA 1972), so normal equitable rules apply. The equitable mortgage will have priority against anyone except a bona fide purchaser for value of the legal estate without notice.
156
In both registered and unregistered land, where the mortgage is secured only upon an equitable interest (e.g. life interest), what is its priority of ranking?
(From Dearle v Hall [1823]) Priority ranks according to the time at which the trustees of the legal estate receive notice of the mortgage. This is subject to the doctrine of notice, so that any mortgagee who has actual or constructive notice of the existence of a prior mortgage when they lent the money cannot gain priority over that prior mortgage by giving notice to the trustees first.
157
What is “tacking” in relation to priority of interests?
When a mortgagee who, having lent money to a mortgagor, makes further advances to them and ‘tacks’ on the advance to their original mortgage and thereby claims priority over any other mortgagees.
158
What are the three cases in which a mortgagee can tack their further advance to their original mortgage and thereby claim priority over any other mortgagees?
s94(1) LPA 1925 provides three cases in which a mortgagee can tack their further advance to their original mortgage and thereby claim priority over any intervening incumbrancer (other mortgagees).
(1) Where the intervening incumbrancer agrees to the tacking.
(2) Where the tacking mortgagee has no notice of the existence of any intervening mortgages. If the intervening mortgage is protected by deposit of title deeds or if the mortgage, being registrable, is so registered, then there is notice.
(3) Where the prior mortgage imposes an obligation on the mortgagee to make it, then tacking can take place even if there is express notice. E.g. a bank binds itself to honour an overdraft of £10,000, the bank will tack away!
159
What does the priority of mortgagees actually determine?
Priority affects only the order in which the competing mortgagees will be paid out, not the order in which they can exercise their rights. As soon as the necessary requirements are satisfied, each mortgagee is entitled to exercise their rights – they do not all have to wait until the first mortgagee takes steps.
160
If the borrower (mortgagor) is a company, what type of charge will they usually take?
A fixed charge, which is where borrowing is secured over a specific asset. If the borrower defaults, that asset will be taken to pay back the loan.
When the borrower (mortgagor) attaches a charge to an asset, but not in a fixed way - the charge ‘floats’ over the asset. These assets can be sold and traded during the day-to-day running of the business.
161
What happens to floating charges if the company runs into financial difficulty?
If the company runs into financial difficulty, a floating charge will “crystallise” and the company cannot deal in or sell the assets covered by the floating charge.
162
If the company is borrowing money to be secured on a property, where else (not HMLR) must the mortgage be registered and how long is the deadline?
At Companies House within 21 days of the charge being created. Once the charge is registered at Companies House, they will issue a certificate of registration of the charge, which must accompany the HMLR application for registration.
163
What is the name/code of the main application form for registration of a company charge?
MR01.
